Borrow now to invest, expand, economist says

To prepare for the next five years of growth technology, companies should borrow and invest to become more competitive. See video summary, with more advice included below.

Mark T. Hoske

03/08/2013

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Based on the next four to five years of anticipated U.S. economic growth, Alan Beaulieu, president and economist with ITR Economics, provided a list of recommendations for technology companies. Beaulieu was speaker at the 2013 Robotics Industry Forum last month and is slated to keynote the CSIA Executive Conference in May.

Technology companies should model positive leadership within the organization; invest in customer market research and training programs; review and augment competitive advantages; spend money on new products, marketing, and advertisements; improve efficiencies with investments in technologies and software; check systems for readiness to accommodate increased activity; add sales staff and hire top people; lock in costs when practical; judiciously examine credit; and work on “what’s next.” Find out what your customers care about and spend money to satisfy those needs. This will cost some money to do it right, and now is the time to borrow, he noted, with low interest rates. Year 2019 will be like 2009, so be ready, Beaulieu suggested.

Beaulieu started his presentation by explaining that ITR Economics has a 96.2% accuracy rating across all industries. Economists don’t often want to talk about accuracy, he observed. Other trends and advice that he delivered, with additional humor, follow.

The U.S. economy will stay positive in 2013, and GDP industrial production will stay above last year’s levels for the year. Most Americans think this is a tepid recovery, and 40% of Americans still think we’re in recession. Why? Unemployment is still high. And perhaps some watch too many cartoons and do not read as much news as they should, he suggested.

New industrial orders will increase 3% for 2013.

The only soft spot in the next five years will be a slight consumer-led recession late in 2014. It won’t be a double dip.

Rough in 2019

Generally, the U.S. economy will be up through 2018. “If you’re able, I suggest you retire in 2018,” he told the audience. “If you’re a business owner, you might consider selling in 2018...to someone you don’t like...in another state...for cash. Or give the business to your kids if you need to teach them that life isn’t always positive. If you’re not old enough to retire, get yourself into position to buy a competitor in 2019.” Don’t be overextended in 2018.

Clearly we’re in recovery, leading indicators are pointing up, liquidity is not an issue, exports are up, we have a stimulative monetary policy, employment is rising and companies are right-sized, banks are lending, and retail sales and construction spending are improving. As individuals, in the past few years we’ve done what our government cannot do: reign-in spending, increase savings, and reduce debt.

Borrow now to invest

If you’re in a business with a good balance sheet, he said, you should be borrowing now to invest in the business. In 2013 borrow as much as you can; get record low rates to invest in your future. You can borrow today at 3% or in the future at 7%. How much should you borrow and invest? Borrow until you cannot sleep at night, he said. Real estate and rental properties are good to buy now to enhance your retirement portfolio. This will change in 2014 because of regulatory changes that progressively will get more severe.

Interest rates won’t stay low. We are not Japan. History tells us this is the left-hand side of a curve, and for those not old enough to remember, there is a right-hand side. For next 20-25 years there will be increases in interest rates. Ask those who have lived through it. Everything is different when rates go toward the right-hand side of the curve.

Energy independence is nearly here; we can be a net exporter of oil. We can attract foreign investment into the U.S. to create the roaring 2020s. Monterey Bay alone may have 1.4 times the oil reserves of Saudi Arabia.

Manufacturing is coming back into the United States, which will be more globally competitive than in the past as shown by manufacturing as a percentage of GDP. Companies are making cars in the Carolinas to export to South America.

Concerns: Budgetary mismanagement

There are some concerns, Beaulieu said.

China will expand because of stimulus money in 2013. China is interested in creating jobs and keeping its population happy. We will sell more goods there. China’s growth will slow in 2014.

“Fiscal cliff” is a bad name given to help Congress understand the problem that it created. We then are supposed to pat Congress on back for partially solving that problem it created.

Let’s be clear that in Congress, budget cuts currently mean a slower rate of deficit increase, not actual cuts to the deficit. Leaders in Canada have made actual cuts, and in 2016 they will be in the enviable position of being debt free, able to lower corporate tax rates to attract businesses. Deficit math apparently remains difficult for those in the U.S. government to comprehend as annual budget deficits continue to add to nearly $17 trillion federal debt. Please note that there is so much debt and so much government overspending that raising taxes on the top 1% would be a very small dent and would only placate those who believe rich people are evil. Total U.S. public debt is 120% of GDP. Stimulus cannot cut the deficit. We are past the point where the U.S. economy can grow enough to eliminate the debt.

Be encouraging

Find ways to inspire employees facing higher energy, food, health, tuition, and FICA expenses. (He recommended reading Jack Stack’s “The Great Game of Business: Unlocking the Power and Profitability of Open-Book Management.”) Without encouragement, employees can bring discomfort to work, leading to bad attitudes, decreased productivity, and lower levels of customer satisfaction. We have to find ways to pay employees more without increasing net costs.

As for the fear of defense spending decreases, we’re already below last year’s levels, and we’re winding down two wars. Of course we can cut defense spending.

Those in business need to advise government. Only the USPS cuts service instead of waste when faced with huge annual deficits.

Avoid predispositions and political labels. There’s no political party more or less likely to increase or decrease the debt. It depends more on global events.

Also note that U.S. “sequester” cuts, touted as severe, are miniscule compared to cuts going on in Europe. However, because of efforts there, most of Europe will have a balanced budget in 7 years. At our current rate of progress, 2060 is when we balance our budget. That means economic strength will fall to Europe, with a stronger Euro than dollar, in the long term.

Unsustainable spending will lead to Depression

An international comparison of healthcare spending from 1980-2008 shows that U.S. healthcare is extremely expensive. If we only use current methods to address the budget, health care, and social security, our goose is cooked. U.S. spending is unsustainable, and we’ll face a Depression in the 2030s as it all collapses on itself. At least we’ll have our smartphones to tell us where the food lines are.

Because life expectancies have increased, the retirement age also must increase to help address the demographic (not ObamaCare) problem. Those of us over age 55 outnumber those under 18 for the first time. Means testing must be used to help pay for premiums. These were intended as social safety nets, not universal entitlements. As for ObamaCare, it will cost jobs and hours (5-10 hours week) for those who don’t work full-time and do not have access to healthcare. And raising minimum wages, studies show, also causes job losses among the people it is intended to help.

Dodd-Frank is a horrible law: 848 pages without a single regulation.

The ITR Leading Indicator shows the next 11 months are likely to be positive.

The audience asked many questions, including, “Is a way to avoid the Depression predicted for the 2030s?” Beaulieu suggested that if the U.S. hasn’t adopted an austerity mind-set by the end of this decade, we won’t be able to avoid Depression, given current trends. For those under 40 now, note that a Depression creates buying opportunities that will not quit. For those prepared, there are real-wealth creation opportunities.

“What can change the future?” another asked. As tragic as they were, 9-11 and Hurricane Katrina didn’t change the U.S. economy much. Changes have to be applied consistently over many years to create real change. Only something really big can change long-term economic trends quickly, he said, like a comet hitting the planet or some kind of endemic that wipes out most of the elderly. Having children at a sustainable rate is very important to a nation’s long-term prosperity. We’re a little behind there, but an immigration policy revision could take care of that.

Beaulieu said the future presents challenges and opportunities, and we cannot hand responsibility to government or culture. Capitalism, free markets, business, and innovation hold answers to every big problem. Providing the right education, jobs, and technologies will allow us to overcome challenges and make the difference for a free and prosperous future. It’s our turn. We have to do it. There is no option.